Currency tradingis normally about economic fundamentals. The value of, say, the US dollar against the euro is typically a function of interest rates (if US rates slip below eurozone rates, the dollar will weaken) plus key economic data releases a bad US non-farm payrolls number will hit the greenback, as would a GDP slump.
However, every now and again politics throw a spanner in the works.
As the Telegraph's Jeremy Warner notes "when politics and economics collide the economics always end up winning". Yet recently, the euro's hideously flawed economics (one currency for economies as diverse as powerhouse Germany and the effectively bust Greece, Ireland, Portugal and possibly Spain) have played second fiddle to politics.
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A mixture of money printing (quantitative easing) generating cash that has to find a home somewhere, plus a belief in the ability and willingness of the Germans to backstop every state in the eurozone, has prevented a euro meltdown. But for how much longer?
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Irish and Portuguese bond yields have soared and are now setting new records as investors demand ever-higher returns for taking the risk of going anywhere near their sovereign paper.
Meanwhile, German Chancellor Angela Merkel has been doing her best to convince markets that she would be committing political suicide to offer a blank cheque to every failed state written on behalf of prudent German taxpayers. As Warner notes, the euro may limp on from here but "there is always the risk that social unrest and/or German disillusionment might tear it apart".
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So, forspread betters now could be a great time to short the euro. But against what?
The US seems closer than ever, after the latest mid-term election results, to economic and political paralysis. Meanwhile, the UK is grappling with the impact of public sector job cuts and tumbling house prices.
So perhaps the best bet is a short euro/long yen trade. Sure, the euro is already at a two month low against the yen. But while Japan's problems are well known, not new and largely baked into the price, the Euro's nightmares could be just kicking off.
